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Why File a Chapter 13 Instead of a Chapter 7?
A debtor might not be eligible for Chapter 7 based on a prior Chapter 7 in the last 8 years and income above certain levels. Or, it might be better for your situation: Chapter 13 allows you to: Stop foreclosure and cure home arrears; Pay of priority taxes through the plan; Cram down on vehicle (lower car payment and interest rate); Protect non-exempt assets; Strip off a 2nd mortgage; Extended protection from student loans and other reasons. There are a lot of good reasons to file Chapter 13!
Chapter 13 Bankruptcy process. What happens after filing?
A Chapter 13 Bankruptcy is commenced, just like a Chapter 7, by filing forms with the appropriate Bankruptcy Court. The main form is a called voluntary petition but there are a LOT of other forms that need to be field to make sure your case is properly filed. All of these forms can now be filed electronically. Where the debtor chooses to file a case depends on where the proper venue for the debtor is. Venue for most consumer cases is going to be where the debtor has lived for the 91 days prior to the filing date. The current filing fee for a Chapter 13 case as of the date of this writing is $310. That fee is typically paid when the case is filed.
The forms for Chapter 13 are very similar to the forms for a Chapter 7. The main difference is that in Chapter 13 the debtor must also file a “Plan.” The goal of the Chapter 13 is to get this plan “Confirmed” by the Court which really just means approved by the Bankruptcy Judge. There may be objections from creditors and/or the Chapter 13 Trustee that need to be resolved before the plan can be confirmed. The Bankruptcy Code has very specific requirements that the plan must meet. These requirements mandate that the plan treat certain creditors in a certain way. The confirmation process is typically 3-5 months after the case is filed. It will usually take several plans before a plan gets final confirmation. There can be a lot to fight about during the plan confirmation and that’s why you need to have a high quality, experienced bankruptcy attorney on your side. Contested matters can include: Valuation of certain assets; Disposable income; Treatment of certain claims in the plan; Other issues – it’s not possible to go over all issues and each case is unique which is why it’s so important to get a good lawyer.
Just like in Chapter 7, a Chapter 13 filing puts into effect the Automatic Stay which protects the debtor from most creditor actions. The Chapter 13 Plan will require that the debtor make monthly payments to the Chapter 13 Trustee. The first payment is due 30 days after the case is filed. The Trustee is placed in charge of distributing those funds to all relevant creditors, depending on how the plan treats them. The Trustee doesn’t begin to pay creditors pursuant to the plan until the plan is confirmed.
There’s a creditor meeting in Chapter 13 just like in Chapter 7. It also occurs about a month after the case is filed. Shortly after the case is filed the Bankruptcy Clerk will send out the 341 creditor meeting notice. This notice will also have the deadline for creditors to file claims, the deadline to object to exemptions and the discharge and it will also have the date for the first confirmation hearing and the deadline to object to plan confirmation.
There’s a lot going on behind in the scenes in a Chapter 13 case. The debtor needs to provide the Trustees with a lot of documentation prior to the hearing. The debtor also needs to be keeping a close eye on the claims filed in the case. The debtor may want to object to certain claims or in other cases the debtor may actually want to file a claim on behalf of a creditor. For non-governmental units, the deadline to file a claim is 70 days after the case is filed.
Getting the plan confirmed to the best terms possible for the debtor is the job of the debtor’s attorney. That’s what I do. However, there are competing interests… The Trustee and various creditors will typically want the debtor to pay as much as possible into the plan before the plan is confirmed. This is the back and forth of the confirmation process that can take several months and several plans to complete. Once the plan is confirmed… the debtor and the creditors are now bound by the terms of the plan. I like to call it a light at the end of the tunnel… If you honor the terms of the plan… you get to the light… which is the discharge. That’s how you get a discharge in a Chapter 13… you complete the plan. The plan payment period can last from 3-5 years. Getting the plan confirmed is a huge deal because now it’s crystal clear what needs to be done by the debtor to get the discharge and properly finish out the bankruptcy. However, 3-5 years is a long time and a lot can happen during that time. Below, I’m going to talk about what options are available for a debtor who is in the middle of a Chapter 13, but gets thrown a curve ball… as life tends to do.
Chapter 13 Bankruptcy options when things don’t go as planned.
Chapter 13 can take a long time. A lot can happen in 3-5 years, so often there are steps that need to be taken after the plan is confirmed, but before the plan is completed.
An unfortunate thing that can happen to a debtor mid plan is that they lose their job. If the debtor loses their job and can’t find replacement income it’s unlikely that they will be able to a continue to make the required plan payment. In these cases, the debtor should always explore whether conversion to Chapter 7 is an option. To successfully convert to Chapter 7, the debtor has to be eligible, which means the debtor cannot have a Chapter 7 case filed within the 8 years prior to the FILING of the Chapter 13. This needs to be looked at closely because by the time the debtor is looking to convert the case… it may be more than 8 years… but it’s the filing date of that Chapter 13 case that matters. If the debtor had a Chapter 7 case filed within 8 years of filing the Chapter 13, conversion to Chapter 7 is not an option if the debtor is seeking a discharge, and consumer debtors are almost always seeking a discharge. The bankruptcy code provides that the debtor has an absolute right to convert from Chapter 13 to Chapter 7 but conversion is tricky! You need to make sure you have an experienced bankruptcy attorney that fully understands all consequences of conversion.
The Bankruptcy Code also provides that the debtor has the right to voluntarily dismiss their own Chapter 13 case. However, if the case was previously converted from another Chapter to Chapter 13 the debtor does not have the absolute right to dismiss that case. There are instances where voluntary dismissal makes a lot of sense, but this is also tricky and full of potential traps for the unwary. If you voluntarily dismiss your case and there was a motion for relief from stay filed in your case, you can’t file any bankruptcy for 180 days after dismissal. You get 180 day vacation from bankruptcy in that scenario.
Probably the most common post-confirmation occurrence in Chapter 13 is a plan modification. There can be a lot of reasons to modify a confirmed plan… A change in income or circumstances might require a modified plan that can either lower or increase plan payments. There might be secured asset (typically a car) that is being provided for in the plan that gets wrecked. This happens all the time and the in those cases the prudent thing to do is to modify the plan to provide for the surrender of the asset, and subsequent discharge of the unsecured debt.
Things change… life happens… and while there are limitations, many times your bankruptcy case can change as well to provide the debtor with the best benefit possible.
Chapter 13 Bankruptcy Creditors.
As you now understand, Chapter 13 is a reorganization plan where the debtor makes payments into a plan for three to five years. What is really great about Chapter 13 is because you have this plan or “reorganization,” you can modify the rights of certain creditors by how you treat them in that plan. This is awesome! Let me give you some more detail…
Within the entire bankruptcy code, Chapter 13 is without question the best place where a debtor can impact the rights of secured creditors, to the debtor’s benefit. In many cases you can change the terms of your contract with secured creditor. Chapter 13 allows the debtor to change the terms of the deal, to the debtor’s benefit.
Options available to a debtor in Chapter 13 include: Lowering the amount you have to pay a creditor on an asset. Usually this is a car. There are some exceptions but one of the best things I can do for a debtor in Chapter 13 is put the car into the plan and only pay the value of the car, NOT what the debtor owes; Lowering the interest rate on car; Paying a creditor over a longer period of time… curing mortgage arrears; SAVING YOUR HOUSE FROM FORECLOSURE; WIPING A LIEN OUT ENTIRELY – STRIP OFF OF 2ND MORTGAGE; Surrender of the collateral and much more!